This week the US Treasury will flood the bond market with sales of short and long term bonds.
Energy traders will be very alert to bond buying coverage. Should the demand for bonds fall short of expectations, watch for the US dollar to continue its fall vs. the euro, paving the way for more gains on crude and refined products.
The bond sales by the US government are coming at a time when world wide equity markets are on the rise and general consensus has shifted to an improving world wide economy. This will further dampen demand for, "flight to safety," US bonds and cause bond yields to rise.
Investors will tend to favor the recent trend in allocating more funds to equities and commodities, seeking diversification to avoid certain inflation.
Energy investors should increase long positions on any pull backs.
Sunday, July 26, 2009
Sunday, July 19, 2009
Equities Saying Goodbye to the Recession
This week most equity investors bid their farewell to the recession. Everyone from JP Morgan Chase to Merrill Lynch boldly announced not only that the recession is over, but that growth recovery has begun. Should they be using more caution?
Equity investors make their money by predicting the future. Future earnings growth, to be specific. Generally they are looking six to twelve months ahead of the present to determine which companies will be the leaders in generating income. Yet it was a look into the past that sparked equities higher.
Goldman Sachs and JP Morgan blew away Q2 earning per share expectations. This was all investors needed to assure themselves that the banking problems are behind and solid growth can be expected.
The news this week had disappointments with CIT announcing bankruptcy is imminent. Also, Bank of America declared that difficulties still lie ahead with problem loans. Investors did not blink an eye at these warnings and continued to buy heavily on the price dips.
Energy complex traders fed off the excitement in equities and the falling US dollar to drive crude, gasoline and distillate futures higher.
All indications point to the equity trader's optimism to be justified. Energy investors would be best served by accepting the recovery is coming and base trades on a bull trend strategy. Caution and patience will be needed in waiting for pull back down days and not to chase the market at daily highs.
Equity investors make their money by predicting the future. Future earnings growth, to be specific. Generally they are looking six to twelve months ahead of the present to determine which companies will be the leaders in generating income. Yet it was a look into the past that sparked equities higher.
Goldman Sachs and JP Morgan blew away Q2 earning per share expectations. This was all investors needed to assure themselves that the banking problems are behind and solid growth can be expected.
The news this week had disappointments with CIT announcing bankruptcy is imminent. Also, Bank of America declared that difficulties still lie ahead with problem loans. Investors did not blink an eye at these warnings and continued to buy heavily on the price dips.
Energy complex traders fed off the excitement in equities and the falling US dollar to drive crude, gasoline and distillate futures higher.
All indications point to the equity trader's optimism to be justified. Energy investors would be best served by accepting the recovery is coming and base trades on a bull trend strategy. Caution and patience will be needed in waiting for pull back down days and not to chase the market at daily highs.
Saturday, July 11, 2009
'Tis The Season
Successful equity and commodity investors find that trading ideas are best analyzed through fundamental, technical, or a combination of these two techniques. For energy sector investors a third technique should be added to their arsenal, seasonal trends.
Seasonal analysis involves looking for price movements that tend to occur on a repetitive basis during a particular given time frame for a given market or sector.
The most important aspect of seasonal trading is to not expect a given seasonal trend to magically produce profits every time around. Instead, traders should use a seasonal trend as a catalyst and then make reasonable decisions regarding risk management and trade selection to exploit the potentially profitable situation.
Over the past two decades, the energy sector has demonstrated a strong seasonal tendency to advance during the late-winter, early-spring time period. By late winter, the supply of raw energy products may be running low and production may be gearing up for the upcoming summer driving season. This seasonal low supply, high demand phenomenon creates an excellent trading set up.
A couple of low cost ways to capture this trend is to buy an energy equity mutual fund such as the Fidelity Select Energy Fund (FSNEX), or buying an ETF such as the S&P Select Energy SPDR Fund (XLE). Going back 21 years to 1989 to test this theory, 20 years would have been profitable, with an average annual rate of return at 10.8%, by buying only in the months of March, April and May. In 2009 the return was a record 41.4%.
There is no way to know whether this trade will be profitable in any given year. Seven years in the above trading scenario produced returns of 3% or less. Because of this unknown and occasionally low annual rate of return, many investors who are aware of this trend will not invest. Others will be too over confident and fail to implement proper risk management in executing the trade. The investor who is aware of the risks and plans accordingly, will be rewarded with a high probability profit boost to his trading account.
Seasonal analysis involves looking for price movements that tend to occur on a repetitive basis during a particular given time frame for a given market or sector.
The most important aspect of seasonal trading is to not expect a given seasonal trend to magically produce profits every time around. Instead, traders should use a seasonal trend as a catalyst and then make reasonable decisions regarding risk management and trade selection to exploit the potentially profitable situation.
Over the past two decades, the energy sector has demonstrated a strong seasonal tendency to advance during the late-winter, early-spring time period. By late winter, the supply of raw energy products may be running low and production may be gearing up for the upcoming summer driving season. This seasonal low supply, high demand phenomenon creates an excellent trading set up.
A couple of low cost ways to capture this trend is to buy an energy equity mutual fund such as the Fidelity Select Energy Fund (FSNEX), or buying an ETF such as the S&P Select Energy SPDR Fund (XLE). Going back 21 years to 1989 to test this theory, 20 years would have been profitable, with an average annual rate of return at 10.8%, by buying only in the months of March, April and May. In 2009 the return was a record 41.4%.
There is no way to know whether this trade will be profitable in any given year. Seven years in the above trading scenario produced returns of 3% or less. Because of this unknown and occasionally low annual rate of return, many investors who are aware of this trend will not invest. Others will be too over confident and fail to implement proper risk management in executing the trade. The investor who is aware of the risks and plans accordingly, will be rewarded with a high probability profit boost to his trading account.
Saturday, July 4, 2009
Crude and Products Break Support
The strengthening US dollar helped to bring crude and refined products below support levels last week. Gas futures led the way by breaking $1.90. Crude followed gas future's lead by closing the week under $68.
The US dollar is being buoyed by a combination of continuing loss of jobs in the US and speculation the European Central Bank will be forced to lower interest rates to boost a very weak European economy. It is a short term flight to quality, that will likely see the euro back in demand by beginning of next year.
Gas prices historically tend to drift lower after the 4th of July weekend's peak driving season. The probability of the lower trend continuing is strengthened by weak demand for gas and diesel. However, stay tuned to the weather forecasts. It only takes one major hurricane in the gulf to swing the market.
The US dollar is being buoyed by a combination of continuing loss of jobs in the US and speculation the European Central Bank will be forced to lower interest rates to boost a very weak European economy. It is a short term flight to quality, that will likely see the euro back in demand by beginning of next year.
Gas prices historically tend to drift lower after the 4th of July weekend's peak driving season. The probability of the lower trend continuing is strengthened by weak demand for gas and diesel. However, stay tuned to the weather forecasts. It only takes one major hurricane in the gulf to swing the market.
Saturday, June 20, 2009
Inflation On Hold for Now
A bit of inflation relief on lower than expected wholesale and consumer prices helped continue a near term shift in the selling the dollar/buying commodities arbitrage trade. How long will it continue?
The lower inflation data gives the Fed more time to stimulate the economy before it will need to raise interest rates. Traders realizing this, began taking profits, helping the dollar to rebound.
RBOB futures led the energy complex lower this past week. Gas inventories showed a greater than expected build leading to a sell off below $2.00 support. Traders will be watching crude's support at $69. Should it give way, we will likely see a further pull back in the complex.
Traders will also be closely watching this week's inventories looking for another large build in gas. RBOB will receive some support for falling prices by the 4th of July driving patterns and as we enter further into the hurricane season. The Iranian protests have the potential to drive the complex higher should the Iranian government increase aggression.
Inflation will eventually take hold in the US. The beginning of price increases has been temporarily delayed. Longer term traders will be looking to take this temporary pull back to put the US$/commodities arb positions back on.
The lower inflation data gives the Fed more time to stimulate the economy before it will need to raise interest rates. Traders realizing this, began taking profits, helping the dollar to rebound.
RBOB futures led the energy complex lower this past week. Gas inventories showed a greater than expected build leading to a sell off below $2.00 support. Traders will be watching crude's support at $69. Should it give way, we will likely see a further pull back in the complex.
Traders will also be closely watching this week's inventories looking for another large build in gas. RBOB will receive some support for falling prices by the 4th of July driving patterns and as we enter further into the hurricane season. The Iranian protests have the potential to drive the complex higher should the Iranian government increase aggression.
Inflation will eventually take hold in the US. The beginning of price increases has been temporarily delayed. Longer term traders will be looking to take this temporary pull back to put the US$/commodities arb positions back on.
Saturday, June 6, 2009
US$/Euro and Its Seven Year Influence on Oil
Since 2002 the euro has trended steadily higher versus the U.S. dollar. The same is true of the price of a barrel of oil versus the U.S. dollar. Recognition of the inverse correlation between the falling U.S dollar and the rising price of oil has been used by professional investors to profitable advantage for the past seven years. The correlation pattern will not only continue, the strength of the correlation will increase.
Investors must have an advantage over other market participants in order to enjoy lower risk and higher return on investments. There has been no better barometer of crude market direction than its correlation to the currency pairing value of the euro vs US$. This relationship was most evident in September of 2008 with the destruction of Lehman Brothers. The correlation coefficient reached an all time high of .93. Investors alert to the rapid rise in the strength of the dollar knew crude had much further to fall.
Investors must be aware that although crude and the dollar move inversely, the movement alerts to trend direction not exact price movements. Yesterday, the US$ rose almost 300 points vs the euro. However, crude along with gas and diesel futures remained flat to slightly higher on the trading session. This price action also indicates that the energy complex is anticipating a rebound in the euro.
There are literally hundreds of factors affecting the price of crude each day. The key to successful investing is knowing which factors will have the greatest influence. Staying alert to directional price movements of the euro/US$ currency pair will give the investor the competitive advantage needed to maintain sufficient return on capital.
Investors must have an advantage over other market participants in order to enjoy lower risk and higher return on investments. There has been no better barometer of crude market direction than its correlation to the currency pairing value of the euro vs US$. This relationship was most evident in September of 2008 with the destruction of Lehman Brothers. The correlation coefficient reached an all time high of .93. Investors alert to the rapid rise in the strength of the dollar knew crude had much further to fall.
Investors must be aware that although crude and the dollar move inversely, the movement alerts to trend direction not exact price movements. Yesterday, the US$ rose almost 300 points vs the euro. However, crude along with gas and diesel futures remained flat to slightly higher on the trading session. This price action also indicates that the energy complex is anticipating a rebound in the euro.
There are literally hundreds of factors affecting the price of crude each day. The key to successful investing is knowing which factors will have the greatest influence. Staying alert to directional price movements of the euro/US$ currency pair will give the investor the competitive advantage needed to maintain sufficient return on capital.
Tuesday, June 2, 2009
Banking on Bakken
The North American Bakken oil field has been reported to contain up to 500 billion barrels of oil. If true, this would be the single largest oil deposit in the world.
Located in the Rocky Mountains on the Montana and North Dakota borders, the Bakken oil field has been extensively studied and extensively promoted as a solution to U.S. energy supply needs.
The spread out nature of the oil in this formation makes recovering it an expensive task. Those areas where there is some pooling of oil have already been drilled and developed and to date 105 million barrels of oil have come from the site. A recent report from the United States Geological Survey (USGS) has predicted that a maximum of 4.3 billion barrels of oil can be extracted from the area using conventional technology. Possible technology developments such as horizontal drilling may increase this somewhat. The figure for the amount of recoverable oil in the Bakken formation contrasts sharply with the amount predicted to be present. In 1999 the USGS estimated the total volume of oil in the formation to be in the range of 413 billion barrels.
Located in the Rocky Mountains on the Montana and North Dakota borders, the Bakken oil field has been extensively studied and extensively promoted as a solution to U.S. energy supply needs.
The spread out nature of the oil in this formation makes recovering it an expensive task. Those areas where there is some pooling of oil have already been drilled and developed and to date 105 million barrels of oil have come from the site. A recent report from the United States Geological Survey (USGS) has predicted that a maximum of 4.3 billion barrels of oil can be extracted from the area using conventional technology. Possible technology developments such as horizontal drilling may increase this somewhat. The figure for the amount of recoverable oil in the Bakken formation contrasts sharply with the amount predicted to be present. In 1999 the USGS estimated the total volume of oil in the formation to be in the range of 413 billion barrels.
What then can we make of the claims that this oil field is the solution to America's oil problems, and that development of this field will hail the return of cheap gasoline in the US?
The 4.3 billion barrels of oil available in this area must be seen in context. The United States presently uses somewhere in the vicinity of 7 billion barrels of oil each year, meaning that all the oil readily able to be extracted from this formation would last the US less than eight months. This is in contrast to Saudi oil production which is over 8 billion barrels a year and will continue to be so for some time.
The remainder of the oil in the formation cannot be accessed without great effort and expense. Due to this it is highly unlikely that the field will be developed in a major way until oil prices are so high and demand is so great that there is no alternative.
Clearly the Bakken oil field does not qualify as "the next oil boom". Caution must be exercised when considering investing any money in projects that make improper use of the USGS reports on this formation's oil bearing capacity.
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